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    Controller Library Value Pack
    CFO Library Value Pack
    Accounting Standards Library
    Thursday
    Nov042010

    What is overhead?

    Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.

    Thus, overhead costs do not directly lead to the generation of profits. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. For example, a high-end clothier must pay a substantial amount for rent (a type of overhead) in order to be located in an adequate facility for the sale of clothes. The clothier must pay overhead to create the proper retail environment for its customers.

    Examples of overhead are:

    • Accounting and legal expenses
    • Administrative salaries
    • Depreciation
    • Insurance
    • Licenses and government fees
    • Property taxes
    • Rent
    • Utilities

    Overhead costs tend to be fixed, which means that they do not change from period to period. Examples of fixed overhead costs are depreciation and rent. Less frequently, overhead varies directly with the sales level, or varies somewhat as the activity level changes.

    The other type of expense is direct costs, which are those costs required to create products and services, such as direct materials and direct labor. Overhead and direct costs, when combined, equal all of the expenses incurred by a company.

    Similar Terms

    Overhead is also known as burden or indirect costs. A subset of overhead is manufacturing overhead, which is all overhead costs incurred in the manufacturing process. Another subset of overhead is administrative overhead, which is all overhead costs incurred in the general and administrative side of a business.

    Related Questions

    What is administrative overhead?
    What is indirect overhead?
    What is manufacturing overhead?
    What is the overhead rate?
    What is a plantwide overhead rate?

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